We use cookies to customise content for your subscription and for analytics.If you continue to browse Lexology, we will assume that you are happy to receive all our cookies. For further information please read our Cookie Policy.

Refining the NDRC rules on Chinese outbound investments

In China’s push to create an open yet orderly economy, the National Development and Reform Commission (NDRC) has issued new rules on Chinese outbound investments, effective from 1 March 2018.

In an attempt to refine the rules following the Chinese government’s tightening of capital controls last year which affected the majority of Chinese outbound investments, the new Administrative Measures for Enterprise Outbound Investment (Regulation No.11) provide for clearer and more streamlined regulation of Chinese outbound investments, but also place more scrutiny on investments that may be contrary to China’s economic policies.

a sensitive country or region – being one that has no diplomatic ties with China, or is subject to war, internal strife or where investment is restricted by the international treaties, or agreements China concluded or acceded to; or

a sensitive industry - according to Regulation No.11, sensitive industries include the following:

the formation of equity investment funds or investment platforms without specific industrial projects.

For non-sensitive projects, Regulation No.11 distinguishes between investments made by Chinese investors directly and investments made by offshore entities controlled by Chinese investors:

direct investments are subject to a pre-completion filing requirement - for a centrally-supervised state owned enterprise or an investment by the Chinese participant(s) of USD300 million or more, such filing is made with central NDRC. In all other cases, filing is with the relevant provincial counterpart of NDRC; and

indirect investments are subject to a pre-completion reporting requirement where the investment is USD300 million or more; no pre-completion filing or reporting is necessary otherwise.

Therefore, in relevant cases, transactions with Chinese bidders will still require an NDRC approval or filing condition precent, though Regulation No.11 clarifies that the NDRC approval or filing now only needs to be a condition to completion rather than a condition to the contract becoming effective.

If it is unclear whether a project is subject to NDRC approval or filing, Regulation No.11 also provides a new mechanism for bidders to consult with NDRC beforehand to clarify whether an approval or a filing applies.

Other changes effected by Regulation No.11

State Council approval for sensitive projects of USD2 billion or above is no longer

The requirement to submit a project information report before a bidder commences substantive work, the so-called “road pass”, has been removed. The road pass requirement was originally intended to prevent unhealthy competition. However, it actually adversely affected the timetable and deal certainty of projects involving Chinese bidders. Further, based on our recent experience, NDRC has issued multiple road passes in respect of the same target for a number of years, making the road pass requirement redundant. Regulation No.11 now eliminates the “road-pass” regime.

Local enterprises can now submit their application or filing to central NDRC directly without having to go through the provincial counterpart of NDRC first.

Regulation No.11 also clarifies the scope of its application and imposes a tighter timeframe for the regulators to respond at each stage of the review process.

Many of these changes had been foreshadowed in April 2016, as part of NDRC’s continuous regulatory reform to move gradually from an approval regime to a predominantly filing regime, and to streamline the regulatory process. The reforms were put on hold last year due to the imperative to stem capital outflows, but it is pleasing to see that the reforms have now finally been implemented with more targeted controls underpinned by considered economic policies.

China has vowed to deepen economic reforms and further open its market – an objective clearly articulated in the 19th National Congress of the Communist Party of China.

Moving from the tighter capital controls last year which affected the majority of Chinese outbound investments, China has now refined its regulations to target questionable outbound investments, but encourage beneficial investments that could help China further develop into a leading modern economy under a more streamlined regulatory approach. As stated in the State Council Guidelines, China will continue to support investments in Belt and Road projects, high tech and advanced manufacturing capabilities, resources exploration and development and agricultural cooperation among other encouraged areas.

Sellers around the world with assets and businesses that benefit China’s real economy and which align with China’s economic policies could do well to take advantage of the more targeted oversight on Chinese outbound investments. As one of the top destinations for Chinese outbound investments, Australia in particular should take note.

Compare jurisdictions:Merger Control

"The newsfeeds deliver us the most recent legal analysis and practical information. There seems to be a broad analysis which is beneficial to us in analyzing various areas of law. It provides a snap shot update of various legal developments and assists us in staying current. The articles are well covered and include the right amount of detail. The size and depth of articles are good too, so we can get to the information one needs very quickly. The articles are typically of high calibre and from high-calibre authors who provide sufficiently succinct articles so that one can learn much about new developments in a short amount of time. I like the format because it is easy to scan for relevant articles. It's a great tool. I like the fact you can tailor the newsfeeds by jurisdiction and work area, and only receive information relevant to your practice."